Thursday, May 8, 2014

Hedge Fund Managers Paid Too Much?

Rob Copeland and Christian Berthelson of the Wall Street Journal report, Hedge Funds Extend Their Slide:
A bumpy trading environment is tripping up hedge funds.

Big stumbles by some star managers drove hedge funds to back-to-back monthly declines for the first time in two years, according to researcher HFR Inc.

The lackluster showing—the average hedge fund trailed benchmarks for both stocks and bonds in April—was a blow for an industry that charges more than other fund managers but pitches steady returns in both good times and bad.

Hedge funds on average dropped 0.17% in April, HFR said Wednesday, following a 0.33% decline in March. Funds hadn't turned in two consecutive losing months since April and May of 2012, HFR said.

That performance also trailed the broader stock market, where the S&P 500 rose 0.74% in April, including dividends. Many hedge funds, however, invest in markets other than stocks, and bet concurrently on some positions rising and others falling.

Brad Balter, a Boston-based adviser who helps wealthy investors choose hedge funds, said his clients increasingly are weighing whether they should continue pouring money into these highly paid managers.

"I'm not saying you should judge people in a single quarter, but there's less rope for poor performance," Mr. Balter said. He called the industry's showing in recent years for the most part "mediocre."

The latest industrywide figures come the same week a survey by the trade publication Institutional Investor's Alpha showed that the top 25 highest-earning hedge-fund managers collectively made $21 billion in 2013, an increase of more than 50% over 2012.

Most hedge funds charge some variation of the "2 and 20" model, in which the firm collects a 2% management fee and 20% of investment profits.

Some of the biggest losers among fund managers in April were those who tried to ride last year's big winners: tech stocks.

Coatue Management LLC, the $9 billion New York firm started by Philippe Laffont, a veteran of Julian Robertson's Tiger Management, slid about 4% for its second consecutive month of losses due mostly to tech-related stocks, according to people familiar with its results. Coatue is now down almost 11% for the year, and has given back more than half of its gains from 2013.

Hedge funds that bet on technology and health care as a group fell 3.7%, the steepest drop since 2008, according to HFR.

Jonathan Lennon, founder of hedge fund Pleasant Lake Partners, said it was challenging to navigate an environment in which many technology, media and telecommunications stocks are trading at "nosebleed valuations." He has maintained bets against technology and consumer stocks, which has helped $100 million Pleasant Lake gain about 12% this year.

The pain wasn't limited to tech stocks.

Paul Tudor Jones, a billionaire veteran of the industry and founder of Tudor Investment Corp., this week called the trading environment "as difficult as I've ever seen in my career." Mr. Jones' main fund is down about 4% this year, according to investor documents.

Sloane Robinson LLP, one of London's oldest hedge-fund firms, did even worse, recording a 20% yearly loss in its International fund. The fund has been hurt in part by bets against the Japanese yen, an investor said, a favorite hedge-fund trade from the past year that has hurt managers in 2014. Co-founder Hugh Sloan didn't respond to a request for comment.

But several boldfaced names in the industry shined.

William Ackman's Pershing Square L.P. hedge fund rose 7.3% last month, according to an investor update, helped by the activist's deal to back Valeant Pharmaceuticals International Inc.'s takeover attempt of wrinkle-treatment maker Allergan Inc.

Pershing Square L.P. is up 18.7% for the year through the end of April, according to the document viewed by The Wall Street Journal. The firm manages $13.7 billion overall.

Astenbeck Capital Management, the $3.4 billion commodities hedge-fund firm led by oil trader Andy Hall, gained 3.1% in April and is up more than 11% on the year, according to investor documents.

For some big firms, the problems arose when they switched gears at the wrong time. Quantitative Investment Management LLC, a $2.7 billion firm based in Charlottesville, Va., that frequently shifts its positions based on the firm's models, flipped to shorting U.S. equities early in the month, and began posting losses midmonth as stock indexes rallied, according to an investor communication.

Adding to the firm's pain: QIM had been betting for much of the month on further appreciation for U.S. Treasurys, a haven asset whose prices dropped as stocks rose. QIM's flagship fund ended the month down about 5%, and is now 6% in the red for 2014 overall.

For at least one big fund, staying the course turned out to be the right move.

Viking Global Investors LP, a $27 billion Greenwich, Conn. firm, was down almost 4% in the first two weeks of the month in its flagship fund, in part due to poor-performing bets on tech stocks, but told investors it intended to maintain its positions and ride out the turmoil.

After dropping 3.4% in the first two weeks of April, the Nasdaq-100 tech index roared back with a 4% return in the back half of the month. Viking ended up about 0.4% for April.
I think very highly of Viking Global and Andreas Halvorsen, its founder and CEO. I met Andreas back in 2002 and was extremely impressed. Very sharp guy, well mannered and very polished. He really knows his stuff and so do his analysts and portfolio managers. That's why I track Viking Global every quarter when I look at top funds' activity. It's unquestionably one of the best L/S Equity funds in the world.

But these are treacherous times for most hedge funds. When Paul Tudor Jones tells you "it's as difficult as I've ever seen in my career," you know it's very tough. So what is going on? Basically, those who are on the right side of the big unwind are raking it in this year and those that are long small caps, biotechs and technology are getting killed.

You notice the article refers to Bill Ackman's Pershing Square being up 19% while Philippe Laffont's Coatue is down 11% so far this year. The article also mentions a smaller hedge fund, Pleasant Lake Partners, run by Jonathan Lennon. He's not collecting billions in fees but is up 12% this year. The small guys focus on performance, they can't collect billions in management fees when they are down!

Will the slide in small caps and momentum stocks continue? Who knows? All I know is these schizoid markets can turn on a dime. I used the latest selloff to add to some biotech positions that got clobbered hard. So far, it's painful, I'm getting triple penetrated, but investing in small cap biotechs is as volatile as it gets. If you can't handle extreme swings, it's not for you (on a bright note, Idera Pharmaceuticals just announced a deal with Abbott).

One thing I can share with you is my recent visit to my neurologist. I'm taking part in a Phase II trial of Opexa Therapeutcs' Tcelna (OPXA), but I was talking to the research nurse about other trials by Biogen (BIIB) and Novartis (NVS). In my opinion, Biogen is an exceptional biotech company (run by a Greek American doctor) and you'll see amazing things coming out of their new MS trials. No wonder Michael Castor is long Biogen, he's a smart guy who also knows his stuff on the healthcare sector.

Let me end by stating flat out that most of the top hedge fund managers are way, WAY overpaid. They are what I call 'accidental billionaires' who are the chief beneficiaries of the big alternatives gamble. The same for their private equity and real estate counterparts. Dumb public pension funds chasing yield are getting raped, paying billions in fees, making these gurus obscenely wealthy. The entire hedge fund model is skewed toward the big guys which is why they keep getting richer even if they underperform.

But even the ones that are performing well, do they really deserve billions in compensation? Go back to read my comment on the 1% and Piketty. Has society lost its collective mind when we idolize hedge fund gurus and pay them astronomical amounts? I think so and let me tell you no hedge fund manager I ever met -- and I've met many sharp ones -- comes close to being as brilliant as Charles Taylor who taught me political philosophy at McGill (if you equate money with brilliance, you're an idiot. I know plenty of rich dummies).

Below, CNBC's Jeff Cox looks at the top highest paid hedge fund managers and the billions they made in 2013. This is sloppy reporting. The funds made these amounts, not the managers. Sure, the top guys get the lion's share of the profits but they have to pay a huge chunk to their portfolio managers and analysts. Still, don't shed a tear for hedge fund gurus, they're all way overpaid.